-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, d10lYQMjLaQ6I0J4qdD2CJdxCFHEDuFcnDMq7+ccJQANFKJrS9CLtgBS9Rr8Z7WS l10GKKxp1KBN8hIvqNA2LQ== 0000757011-95-000003.txt : 19950530 0000757011-95-000003.hdr.sgml : 19950530 ACCESSION NUMBER: 0000757011-95-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950511 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: 3270 IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08864 FILM NUMBER: 95536539 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126065439 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-8864 USG CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-3329400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 South Franklin Street, Chicago, Illinois 60606-4678 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (312) 606-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No As of April 30, 1995, 45,088,634 shares of USG common stock were outstanding. Table of Contents PART I FINANCIAL STATEMENTS Item 1. Financial Statements: Consolidated Statement of Earnings: Three Months Ended March 31, 1995 and 1994 Consolidated Balance Sheet: As of March 31, 1995 and December 31, 1994 Consolidated Statement of Cash Flows: Three Months Ended March 31, 1995 and 1994 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Report of Independent Public Accountants PART II OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K SIGNATURES PART I FINANCIAL INFORMATION Item 1. Financial Statements USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data) (Unaudited)
Three Months ended March 31, 1995 1994 Net sales $ 598 $ 506 Cost of products sold 446 396 Gross profit 152 110 Selling and administrative expenses 60 57 Amortization of excess reorganization value 42 42 Operating profit 50 11 Interest expense 27 37 Interest income (2) (3) Other expense/(income), net - 1 Earnings/(loss) before taxes on income 25 (24) Taxes on income 27 10 Net loss (2) (34) Net loss per common share (0.05) (0.87) Dividends paid per common share - - Average number of common shares 45,085,540 39,134,246 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of March 31, December 31, 1995 1994 Assets Current Assets: Cash and cash equivalents $ 94 $ 197 Receivables (net of reserves - $16 and $14) 296 274 Inventories 190 173 Total current assets 580 644 Property, plant and equipment (net of reserves for depreciation and depletion - $90 and $80) 770 755 Excess reorganization value (net of accumulated amortization - $324 and $282) 519 561 Other assets 171 164 Total Assets 2,040 2,124 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable 145 122 Accrued expenses 217 253 Notes payable 5 1 Long-term debt maturing within one year 3 44 Taxes on income 51 35 Total current liabilities 421 455 Long-term debt 1,018 1,077 Deferred income taxes 177 179 Other liabilities 426 421 Stockholders' Equity/(Deficit): Preferred stock - - Common stock 5 5 Capital received in excess of par value 221 221 Deferred currency translation (5) (13) Reinvested earnings/(deficit) (223) (221) Total stockholders' equity/(deficit) (2) (8) Total Liabilities and Stockholders' Equity 2,040 2,124 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Three Months ended March 31, 1995 1994 Operating Activities: Net loss $ (2) $ (34) Adjustments to reconcile net loss to net cash: Amortization of excess reorganization value 42 42 Depreciation, depletion and other amortization 17 18 Deferred income taxes (2) 7 Net (gain)/loss on asset dispositions (3) - (Increase)/decrease in working capital: Receivables (22) (25) Inventories (17) (21) Payables 39 15 Accrued expenses (36) 2 Increase in other assets (7) (9) Increase in other liabilities 5 4 Net cash flows (to)/from operating activities 14 (1) Investing Activities: Capital expenditures (24) (7) Net proceeds from asset dispositions 6 - Net cash flows to investing activities (18) (7) Financing Activities: Issuance of debt 6 114 Repayment of debt (105) (207) Proceeds from public offering of common stock - 224 Net cash flows (to)/from financing activities (99) 131 Net increase/(decrease) in cash & cash equivalents (103) 123 Cash & cash equivalents at beginning of period 197 211 Cash & cash equivalents at end of period 94 334 Supplemental Cash Flow Disclosures: Interest paid 25 22 Income taxes paid 13 4 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION Notes to Consolidated Financial Statements (Unaudited) (1)The consolidated financial statements of USG Corporation and its subsidiaries ("USG" or the "Corporation") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Corporation's financial position as of March 31, 1995 and December 31, 1994; and results of operations and cash flows for the three months ended March 31, 1995 and 1994. While these interim financial statements and accompanying notes are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's independent public accountants. These financial statements and notes are to be read in conjunction with the financial statements and notes included in the Corporation's 1994 Annual Report on Form 10-K dated March 8, 1995. (2)In the fourth quarter of 1994, the Corporation established a revolving accounts receivable facility. Under this new financing program, the trade receivables of United States Gypsum Company ("U.S. Gypsum") and USG Interiors, Inc. ("USG Interiors") are being purchased by USG Funding Corporation ("USG Funding") and transferred to a trust administered by Chemical Bank as trustee. Certificates representing an ownership interest of up to $130 million in the trust have been issued to an affiliate of Citicorp North America, Inc. USG Funding, a special purpose subsidiary of USG Corporation, is a separate corporate entity with its own separate creditors which will be entitled to be satisfied out of USG Funding's assets prior to any value in USG Funding becoming available to its shareholder. Receivables and debt outstanding in connection with the receivables facility remain in receivables and long-term debt, respectively, on the Corporation's consolidated balance sheet. (3)On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law. The Corporation accounted for the restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five-year period, effective May 7, 1993. (4)Income tax expense amounted to $27 million and $10 million for the three months ended March 31, 1995 and 1994, respectively. The Corporation's income tax expense is computed based on pre-tax earnings excluding the non-cash amortization of excess reorganization value, which is not deductible for federal income tax purposes. Further, under the provisions of SOP 90-7, the benefits of the domestic net operating loss carryforwards ("NOL Carryforwards") discussed below are not reflected in income tax expense. The Corporation has NOL Carryforwards of $49 million remaining from 1992. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Internal Revenue Code limits the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Internal Revenue Code to the exchange of stock for debt, the Corporation's NOL Carryforwards to 1994 and later years could be reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. (5)As of March 31, 1995, 2,750,555 common shares were reserved for future issuance in conjunction with existing stock option grants. An additional 11,105 common shares were reserved for future grants. (6)One of the Corporation's operating subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action have so ruled. The carriers are seeking reconsideration of the Illinois Supreme Court's refusal to review the appellate court's ruling. In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. (7)On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. Debentures totaling $22 million and $33 million were recorded on the holding company's books of account as of March 31, 1995 and December 31, 1994, respectively. Summary financial results for U.S. Gypsum are presented below (dollars in millions):
Three Months ended March 31, Summary Statement of Earnings 1995 1994 Net sales $ 332 $ 269 Cost and expenses 255 224 Amortization of excess reorganization value 15 15 Operating profit 62 30 Interest expense, net - - Corporate charges 22 24 Earnings before taxes on income 40 6 Taxes on income 21 9 Net earnings/(loss) 19 (3)
As of As of March 31, Dec. 31, Summary Balance Sheet 1995 1994 Current assets $ 381 $ 345 Property, plant and equipment, net 503 491 Excess reorganization value, net 189 204 Other assets 106 103 Total assets 1,179 1,143 Current liabilities 212 197 Other liabilities and obligations 256 256 Stockholder's equity 711 690 Total liabilities and stockholder's equity 1,179 1,143
(8)As of March 31, 1995, $298 million aggregate principal amount of 10 1/4% senior notes due 2002 were outstanding. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign Investments, Ltd., L&W Supply Corporation, Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the manner described below, the obligations of the Corporation under its bank term loans' credit agreement and 10 1/4% senior notes. The Combined Guarantors are jointly and severally liable under the guarantees. Holders of the bank term loans have the right to: (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the bank term loans and 10 1/4% senior notes pro rata based on the respective amounts owed thereon); and (ii) amend or eliminate the guarantees. The guarantees will terminate when the bank term loans are retired regardless of whether any such 10 1/4% senior notes remain unpaid. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of: (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law); and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank pari passu with all unsubordinated obligations of the guarantor. Subsidiaries other than the Combined Guarantors (the "Combined Non-Guarantors"), substantially all of which are subsidiaries of Guarantors, primarily include CGC Inc., Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries. USG Funding is also a Non-Guarantor. The long-term debt of the Combined Non-Guarantors of $84 million as of March 31, 1995 and December 31, 1994, has restrictive covenants that restrict, among other things, the payment of dividends. The following condensed consolidating information presents: (i) Condensed financial statements as of March 31, 1995 and December 31, 1994 and for the three months ended March 31, 1995 and 1994 of (a) the Corporation on a parent company only basis, (b) the Combined Guarantors, (c) the Combined Non-Guarantors and (d) the Corporation on a consolidated basis. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is not deemed material to investors and is omitted.) (ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method. (iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries. USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Three Months ended 3/31/95 Net sales $ - $ 530 $ 97 $ (29) $ 598 Gross profit/(loss) - 132 20 - 152 Operating profit/(loss) (10) 59 1 - 50 Equity in net (earnings)/loss of the subsidiaries 4 - - (4) - Interest expense, net 23 - 2 - 25 Corporate service charge (38) 41 (3) - - Other expense/(income), net (1) 3 (2) - - Earnings/(loss) before taxes on income 2 15 4 4 25 Taxes on income 4 20 3 - 27 Net earnings/(loss) (2) (5) 1 4 (2) Three Months ended 3/31/94 Net sales $ - $ 443 $ 88 $ (25) $ 506 Gross profit/(loss) - 92 18 - 110 Operating profit/(loss) (9) 21 (1) - 11 Equity in net (earnings)/loss of the subsidiaries 32 4 - (36) - Interest expense, net 33 - 1 - 34 Corporate service charge (42) 42 - - - Other expense/(income), net 1 - - - 1 Earnings/(loss) before taxes on income (33) (25) (2) 36 (24) Taxes on income 1 7 2 - 10 Net earnings/(loss) (34) (32) (4) 36 (34)
USG CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in millions)
Combined Parent Combined Non- As of 3/31/95 Company Guarantors Guarantors Eliminations Consolidated Cash and cash equivalents $ 79 $ (9) $ 24 $ - $ 94 Receivables, net 1 138 194 (37) 296 Inventories - 144 50 (4) 190 Total current assets 80 273 268 (41) 580 Property, plant and equipment, net 15 633 122 - 770 Investment in subsidiaries 1,441 268 - (1,709) - Excess reorganization value, net - 414 105 - 519 Other assets (241) 440 (30) 2 171 Total assets 1,295 2,028 465 (1,748) 2,040 Accounts payable and accrued expenses 77 307 65 (36) 413 Notes payable and LTD maturing within one year - 2 6 - 8 Total current liabilities 77 309 71 (36) 421 Long-term debt 897 37 84 - 1,018 Deferred income taxes 6 154 16 1 177 Other liabilities 312 109 4 1 426 Common stock 5 1 6 (7) 5 Capital received in excess of par value 221 1,438 364 (1,802) 221 Deferred currency translation - - (5) - (5) Reinvested earnings/(deficit) (223) (20) (75) 95 (223) Total stockholders' equity/ (deficit) 3 1,419 290 (1,714) (2) Total liabilities and stockholders' equity 1,295 2,028 465 (1,748) 2,040 As of 12/31/94 Cash and cash equivalents $ 178 $ (11) $ 30 $ - $ 197 Receivables, net - 135 173 (34) 274 Inventories - 136 43 (6) 173 Total current assets 178 260 246 (40) 644 Property, plant and equipment, net 15 623 117 - 755 Investment in subsidiaries 1,436 261 - (1,697) - Excess reorganization value, net - 447 114 - 561 Other assets (227) 426 (28) (7) 164 Total assets 1,402 2,017 449 (1,774) 2,124 Accounts payable and accrued expenses 83 298 63 (34) 410 Notes payable and LTD maturing within one year 41 2 2 - 45 Total current liabilities 124 300 65 (34) 455 Long-term debt 956 37 84 - 1,077 Deferred income taxes 9 155 15 - 179 Other liabilities 308 109 4 - 421 Common stock 5 1 6 (7) 5 Capital received in excess of par value 221 1,438 364 (1,802) 221 Deferred currency translation - - (13) - (13) Reinvested earnings/(deficit) (221) (23) (76) 99 (221) Total stockholders' equity/ (deficit) 5 1,416 281 (1,710) (8) Total liabilities and stockholders' equity 1,402 2,017 449 (1,744) 2,124
USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in millions)
Combined Parent Combined Non- Three Months ended 3/31/95 Company Guarantors Guarantors Eliminations Consolidated Net cash flows (to)/from operating activities $ (42) $ 67 $ (11) $ - $ 14 Capital expenditures - (21) (3) - (24) Net proceeds from asset dispositions - - 6 - 6 Net cash flows (to)/from investing activities - (21) 3 - (18) Issuance of debt - - 6 - 6 Repayment of debt (102) - (3) - (105) Cash dividends (paid)/received - 1 (1) - - Net cash transfers (to)/from corporate 45 (45) - - - Net cash flows (to)/from: financing activities (57) (44) 2 - (99) Net increase/(decrease) in cash & cash equivalents (99) 2 (6) - (103) Cash & cash equivalents - beginning 178 (11) 30 - 197 Cash & cash equivalents - end 79 (9) 24 - 94 Three Months ended 3/31/94 Net cash flows (to)/from operating activities $ (23) $ 17 $ 5 $ - $ (1) Capital expenditures - (6) (1) - (7) Net proceeds from asset dispositions - - - - - Net cash flows (to)/from investing activities - (6) (1) - (7) Issuance of debt 85 - 29 - 114 Repayment of debt (189) - (18) - (207) Proceeds from stock offering 224 - - - 224 Cash dividends (paid)/received - 11 (11) - - Net cash transfers (to)/from corporate 26 (26) - - - Net cash flows (to)/from financing activities 146 (15) - - 131 Net increase/(decrease) in cash & cash equivalents 123 (4) 4 - 123 Cash & cash equivalents - beginning 187 (8) 32 - 211 Cash & cash equivalents - end 310 (12) 36 - 334
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Comparing the first three months of 1995 and 1994, net sales increased $92 million, or 18.2%. Improved sales were reported for each of USG Corporation's core businesses, North American Gypsum and Worldwide Ceilings, as a result of strong housing starts in the fourth quarter of 1994, growth in repair and remodel activity and improving commercial and institutional construction. Gross profit as a percentage of net sales rose to 25.4% from 21.7% due to higher selling prices for all major product lines. Selling and administrative expenses increased $3 million, or 5.3%. However, as a percentage of net sales, these expenses improved to 10.0% from 11.3%. Amortization of excess reorganization value, which was established in connection with USG's financial restructuring in May 1993 and is being amortized over a five-year period, reduced operating profit by $42 million in each first quarter period. Because of the continuing amortization of excess reorganization value, USG reports EBITDA (earnings before interest, taxes, depreciation, depletion and amortization) to facilitate comparisons of current and historical results. EBITDA amounted to $106 million in the first three months of 1995, an increase of $40 million, or 60.6%, versus the corresponding 1994 period. (Note: EBITDA should not be considered as an alternative to net earnings as an indicator of operating performance or to cash flows as a measure of overall liquidity.) Interest expense in the first three months of 1995 declined $10 million, or 27.0%, compared with the first three months of 1994 primarily reflecting a $389 million net reduction of debt principal since March 31, 1994. Income tax expense amounted to $27 million and $10 million for the three months ended March 31, 1995 and 1994, respectively. The Corporation's income tax expense is computed based on pre-tax earnings excluding the non-cash amortization of excess reorganization value, which is not deductible for federal income tax purposes. Further, the benefits of the NOL Carryforwards are not reflected in income tax expense. Net losses of $2 million and $34 million were reported in the first three months of 1995 and 1994, respectively. However, the non-cash amortization of excess reorganization value and reorganization debt discount (included in interest expense) reduced net earnings by $43 million, or $0.96 per share, and $46 million, or $1.17 per share, in the respective quarters. The following is an analysis of USG's results of operations by core business (dollars in millions):
Three Months ended March 31, Net Sales EBITDA 1995 1994 1995 1994 North American Gypsum: U.S. Gypsum Company $ 332 $ 269 $86 $53 L&W Supply Corporation 174 139 4 1 CGC Inc. (gypsum) 25 24 3 2 Other subsidiaries 17 19 5 5 Eliminations (78) (63) - - Total North American Gypsum 470 388 98 61 Worldwide Ceilings: USG Interiors, Inc. 95 96 15 13 USG International 56 45 2 1 CGC Inc. (interiors) 8 8 1 1 Eliminations (10) (9) - - Total Worldwide Ceilings 149 140 18 15 Corporate - - (10) (10) Eliminations (21) (22) - - Total USG Corporation 598 506 106 66
North American Gypsum Net sales of $470 million increased $82 million, or 21.1%, and EBITDA of $98 million increased $37 million, or 60.7%, over the first three months of 1994. For U.S. Gypsum, improved results were driven by the continuing strong demand for gypsum wallboard and related products. Despite unfavorable weather conditions in several parts of the United States, wallboard shipments in the first quarter of 1995 totalled 1.925 billion square feet, a first quarter record and an increase of 3% over the prior-year period. U.S. Gypsum's wallboard plants operated at 96% of capacity in the first three months of 1995 compared to an industry average of 93%. Realized selling prices for wallboard averaged $112.26 per thousand square feet, up 25% and 5% compared to the first and fourth quarters of 1994, respectively. However, improved wallboard margins resulting from the higher selling prices were partially offset by increased unit manufacturing costs as a result of the rising cost of purchased waste paper. Compared to the fourth quarter of 1994, rising waste paper costs resulted in a $2.50 per thousand square feet increase in wallboard unit manufacturing costs. Based on preliminary data issued by the U.S. Bureau of the Census, first quarter 1995 seasonally adjusted annual housing starts averaged 1.297 million privately owned units, down 5% from the average reported a year ago for 1994. Due to the lagged effect on demand for wallboard, first quarter 1995 housing starts will impact second quarter shipments. Approximately 50% of industry demand for wallboard is generated by new housing starts. L&W Supply Corporation, USG's building products distribution business, experienced the highest level of first quarter net sales in its history. This performance resulted from record sales of gypsum products, which account for approximately 50% of L&W Supply's total sales, and increased sales of most non-gypsum product lines. Improved results for non-gypsum products were led by drywall metal, ceiling products and insulation. Results for CGC Inc.'s gypsum business reflect low levels of new residential construction in eastern Canada, offset by export opportunities and growth in the repair and remodel market. Consequently, CGC's net sales and EBITDA improved slightly compared to the first three months of 1994 due to higher wallboard selling prices and increased shipments of wallboard to the United States, offset to a large extent by decreased shipments in eastern Canada. Worldwide Ceilings Net sales of $149 million increased $9 million, or 6.4%, and EBITDA of $18 million increased $3 million, or 20.0%, over the first three months of 1994. Slightly lower net sales for USG Interiors reflect the absence of results in 1995 for the floor division which was divested in December 1994. Excluding floor division results in 1994, net sales and EBITDA for USG Interiors increased 7.2% and 15.4%, respectively. These improvements reflect higher average selling prices for ceiling tile and grid and record first quarter ceiling tile shipments largely due to strong retail and export sales. USG International reported increased sales in all three of its principal geographic markets: Europe, Latin America and the Pacific. Results for Europe benefited from records in production volume, cost performance and net sales. Liquidity and Capital Resources The Corporation significantly strengthened its liquidity and capital resources through its 1993 financial restructuring and subsequent refinancing activities. A major financial objective of the Corporation following its 1993 restructuring has been to deleverage its balance sheet. Since May 1993, outstanding debt has been reduced by over $500 million, eliminating most scheduled maturities until 2000. In the absence of significant unanticipated cash demands, the Corporation believes that cash generated by operations and the estimated levels of liquidity available to it will be sufficient to satisfy its debt service requirements and other capital requirements. As of March 31, 1995, working capital (current assets less current liabilities) amounted to $159 million and the ratio of current assets to current liabilities was 1.38 to 1, versus December 31, 1994 when working capital amounted to $189 million and the ratio of current assets to current liabilities was 1.42 to 1. In the first three months of 1995, cash and cash equivalents decreased to $94 million from $197 million primarily due to a net reduction in debt of $99 million. First quarter debt repayments included $91 million of bank term loans, $41 million of which satisfied the remaining 1994 cash sweep obligation in accordance with the bank term loans' credit agreement. Receivables (net of reserves) increased $22 million, or 8.0%, to $296 million, inventories increased $17 million, or 9.8%, to $190 million and accounts payable increased $23 million, or 18.9%, to $145 million. These increases primarily reflect normal seasonal fluctuations. In the first quarter of 1995, USG's bank term loans' credit agreement was amended for the fourth time since the 1993 financial restructuring. The principal change will permit USG to use excess cash flows generated in the course of a year to make debt paydowns on senior debt and bank term loans in equal amounts at any time during the year, which under the former cash sweep provisions of the credit agreement was limited to year-end payments. This amendment also provides enhanced financial flexibility in the areas of, among others, repurchases of certain public debt and capital spending. Capital expenditures amounted to $24 million in the first three months of 1995, compared with $7 million in the corresponding 1994 period. The Corporation expects that capital expenditures will exceed $100 million in 1995. Substantial capital investments underway at U.S. Gypsum include various projects that will be completed in 1995 to increase wallboard capacity by 600 million square feet through line accelerations and to reduce manufacturing costs. USG Interiors announced a $45 million expansion of its ceiling tile plant in Greenville, Miss., scheduled for completion in 1996 and L&W Supply continues to expand by adding distribution centers and diversifying its product offerings. As of March 31, 1995, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $102 million compared with $61 million as of December 31, 1994. The Corporation's capital investment plans for the next several years anticipate spending at, or above, current levels so long as operating cash flows support such levels and the growth opportunities for such investments remain attractive. The Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies in businesses and markets related to the Corporation's current operations, and the Corporation believes that its available liquidity would be generally adequate to support appropriate opportunities. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action have so ruled. The carriers are seeking reconsideration of the Illinois Supreme Court's refusal to review the appellate court's ruling. In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. See Part II, Item 1. "Legal Proceedings" for more information on legal proceedings. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of USG Corporation: We have reviewed the accompanying condensed consolidated balance sheet of USG CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1995, and the related condensed consolidated statement of earnings and the condensed consolidated statement of cash flows for the three-month period ended March 31, 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. As discussed in Note 6, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois April 21, 1995 PART II. OTHER INFORMATION Item 1. Legal Proceedings Asbestos Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the "Property Damage Cases"). Others of these suits (the "Personal Injury Cases") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos- containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed. As discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $106 million of these policies are presently insolvent. After deducting insolvencies and exhaustion of policies, approximately $550 million of insurance remained potentially available as of December 31, 1994. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U. S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $25.8 million in 1992, $8.2 million in 1993, and $33.4 million in 1994. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. As of March 31, 1995, 40 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to below, involve multiple buildings. In addition, approximately 37 property damage claims have been threatened against U.S. Gypsum. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. U.S. Gypsum is one of many defendants in three pending cases that have been certified as class actions and others that request such certification. On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et al, U.S.D.C. S.C.). In October 1994, U.S. Gypsum executed agreements to settle two other class actions (one of which has now been closed), subject to court approval following notice to the respective classes. One suit was brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C, E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits. The other class action settlement involved approximately 333 school districts in Michigan that had opted out of the nationwide class action. Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County, MI.) The Corporation took a $30 million charge to pretax earning in the fourth quarter of 1994 primarily to cover the cash payments, approximately two-thirds of which was paid in 1994 with the rest payable over the next two years. In addition, U.S. Gypsum will issue discount coupons to the school districts in the nationwide class action for the purchase of plaster products. The coupons, which will be redeemable over ten years subject to annual "caps," will have an aggregate face amount of $50 million. The Michigan settlement was approved by the Court on December 2, 1994, and no appeal was filed. The settlement of the nationwide class action has not yet been presented to the Court for approval. A case pending in state court in South Carolina, which has not been certified as a class action, purports to be a "voluntary" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the other described class actions. (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson case")). The Anderson case also names the Corporation as a defendant, alleging, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. In July 1994, the court in the Anderson case ruled that claims involving building owners outside South Carolina cannot be included in the suit. A case which has yet to be certified as a class action was filed in federal court in the Eastern District of Texas on August 8, 1994. (Kirbyville Independent School District v. U.S. Gypsum, et al., United States District Court for the Eastern District of Texas, Beaumont Division). The case purports to be a class action on behalf of all public building owners and political subdivisions of the State of Texas, including all cities, counties and municipalities. The damages claimed against U.S. Gypsum in the class action cases are unspecified. In total, U.S. Gypsum has settled approximately 94 Property Damage Cases, involving 210 plaintiffs, in addition to the two school class action settlements referred to above. Twenty-four cases have been tried to verdict, 15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial level and two lost, were settled during appeals. Another case that was lost at the trial court level was reversed on appeal and remanded to the trial court, which has now entered judgment for U.S. Gypsum. Appeals on post- trial motions are pending in 4 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totalled $11.5 million. Punitive damages totalling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling $1.45 million, were paid after appeals were exhausted; and two were settled during the appellate process. In 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end; U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. During 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year-end. U.S. Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993. In 1994, 5 new Property Damage Cases were filed against U.S. Gypsum, 5 were dismissed before trial, 19 were settled, 1 was closed following trial or appeal, and 41 were pending at year-end. U. S Gypsum expended $40.6 million for the defense and resolution of Property Damage Cases and received insurance payments of $9 million in 1994. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 54,000 claimants pending as of March 31, 1995 although, as discussed below, approximately 22,000 of such claims are settled but not yet closed. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos- containing products, of the Center for Claims Resolution (the "Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos- Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $222 million remains unexhausted as of December 31, 1994. On January 15, 1993, U.S. Gypsum and the other members of the Center entered into a class action settlement in the U. S. District Court for the Eastern District of Pennsylvania. (Georgine et al. v. Amchem Products Inc., et al., Case No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs includes all persons who have been occupationally exposed to asbestos- containing products manufactured by the defendants, who had not filed an asbestos personal injury suit as of the date of the filing of the class action. The settlement has been approved by the district court, and if upheld on appeal will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos- related disease. Approximately 250,000 purported class members "opted out," or elected to be excluded from the settlement, the district court has found that many of such opt outs resulted from the dissemination by certain plaintiffs' attorneys of deceptive information concerning the settlement; as a result, the court has ordered the resolicitation of individuals who opted out in order to determine whether they still wish to exclude themselves from the settlements. As of December 31, 1994, approximately 10,000 claims naming U.S. Gypsum as a defendant had been filed by "opt outs." In addition, in each year a limited number of class members will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. During 1994, approximately 14,000 Personal Injury Cases were filed against U.S. Gypsum, U.S. Gypsum was added as a defendant in approximately 4,000 cases that had been previously filed, and approximately 23,000 were settled or dismissed. U.S. Gypsum incurred expenses of $38 million in 1994 with respect to Personal Injury Cases of which $37.3 million was paid by insurance. As of December 31, 1994, 1993, and 1992, 54,000, 59,000 and 54,200 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost may increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos Personal Injury Cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum had reached settlements on approximately 22,000 Personal Injury Cases pending on December 31, 1994 for amounts totalling approximately $32 million, to be expended over a three to five year period. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that all asbestos- related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1994, can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $90 million and $100 million (of which all but less than $5 million is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $250 million, of which approximately $235 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number and severity of such claims that are filed, which cannot presently be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. In the property damage phase of the Coverage Action, the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight "test" Property Damage Cases has been decided. On November 4, 1994, the Illinois Appellate Court issued a ruling affirming in part and reversing in part an earlier trial court ruling. The Appellate Court ruled that the eight "test" cases were covered under all insurance policies in effect from the date of installation to the date of removal of asbestos-containing products (known as the "continuous trigger" of coverage). The Court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight "test" cases. The defendant carriers' rehearing petition was denied by the Appellate Court in January 1995, and on April 5, 1995 the Illinois Supreme Court denied the insurers' petition for leave to appeal to that Court. On April 24, 1995, the carriers requested reconsideration of the Supreme Court's refusal to review the Appellate Court's ruling. Once the appellate process has effectively concluded, further proceedings will be necessary in the trial court to apply the appellate court's ruling to all Property Damage Cases other that the eight "test" cases, as well as to resolve certain other remaining issues, some of which could, if determined adversely to U.S. Gypsum, affect the amount or accessibility of available coverage. No schedule has yet been established for the resolution of these issues. The "continuous trigger" ruling, if applied to the Property Damage Cases generally, and subject to the resolution of the remaining issues referred to above, will allow U.S. Gypsum to access all of its available insurance coverage for Property Damage Cases (although the same coverage must also be used for Personal Injury Cases). Under the continuous trigger, all Property Damage Cases would be covered by insurance unless or until such insurance becomes exhausted. U.S. Gypsum is evaluating the impact of the ruling and the remaining issues on past property damage expenditures and, if the ruling is applied to such expenditures, U.S. Gypsum should be able to recover a substantial portion of them, subject to the allocation of costs to insolvent carriers, excess carriers with no defense cost obligations, and carriers that have previously settled. The company is not yet able to estimate the amount of its past property damage expenditures that it could recover or when such recoveries would occur. Nine carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Another carrier, which provided both primary and excess policies to U.S. Gypsum during the 1960's and 1970's, has agreed to pay U.S. Gypsum a total of $38.4 million; $25 million was paid in April 1995 with the rest to be paid in three annual installments. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. Taking into account the above settlements, including participation of certain of the settling carries in the Wellington Agreement, and consumption through December 31, 1994, carriers providing a total of approximately $94 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $210 million of coverage that was unexhausted as of December 31, 1994 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum continues to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. Insolvency proceedings have been instituted against four of U. S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. Many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Accounting Change Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. At that time, in accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. Environmental Litigation The Corporation and certain of its subsidiaries had been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its Subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG- owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. Item 6. Exhibits and Reports on Form 8-K (a) (10) Fourth Amendment, dated as of March 17, 1995, to Amended and Restated Credit Agreement between USG Corporation and USG Interiors, Inc., as borrowers; the Financial Institutions listed on the signature pages thereof, as Senior Lenders; Bankers Trust Company, Chemical Bank and Citibank, N.A., as Agents; and Citibank, N.A. as Administrative Agent. (15) Letter of Arthur Andersen LLP regarding unaudited financial information. (27) Financial Data Schedule (electronic filing only). (b) There were no reports on Form 8-K filed during the first quarter of 1995. Exhibits (10) and (27), which have been filed as part of this Form 10-Q, are not included herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USG CORPORATION By / S / Dean H. Goossen Dean H. Goossen, Corporate Secretary, USG Corporation May 9, 1995 By / s / Raymond T. Belz Raymond T. Belz, Vice President and Controller, USG Corporation EX-15 2 Exhibit (15) May 11, 1995 USG Corporation 125 South Franklin Street Chicago, Illinois 60606 Gentlemen: We are aware that USG Corporation has incorporated by reference into previously filed Registration Statement Numbers 33-22581, 33-52715, 33-36303, 33-40136 and 33-63554 its Form 10-Q for the quarter ended March 31, 1995, which includes our report dated April 21, 1995, covering the unaudited condensed financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, these reports are not considered a part of the registration statement prepared or certified by our firm or reports prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP EX-27 3
5 1,000,000 3-MOS DEC-31-1995 MAR-31-1995 94 0 312 16 190 580 860 90 2040 421 1018 5 0 0 (7) 2040 598 598 446 446 60 0 25 25 27 (2) 0 0 0 (2) (0.05) (0.05)
EX-10 4 EXHIBIT 10 FOURTH AMENDMENT Dated as of March 17, 1995 to AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 6, 1993 This FOURTH AMENDMENT (this "Fourth Amendment") dated as of March 17, 1995 is entered into among USG CORPORATION (the "Company"), USG INTERIORS, INC. ("Interiors") (the Company and Interiors being sometimes collectively referred to herein as the "Borrowers"), the FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (collectively referred to herein, together with their respective successors and assigns, as the "Senior Lenders" and individually as a "Senior Lender"), BANKERS TRUST COMPANY, CHEMICAL BANK and CITIBANK, N.A. ("Citibank"), in their capacities as agents for the Senior Lenders hereunder (in such capacities, the "Agents"), and CITIBANK, in its separate capacity as administrative agent for the Senior Lenders hereunder (in such capacity, the "Administrative Agent"). PRELIMINARY STATEMENTS. (1) The Borrowers, the Senior Lenders, the Agents and the Administrative Agent have entered into the Amended and Restated Credit Agreement dated as of May 6, 1993 (as amended pursuant to that certain First Amendment dated as of August 1, 1993 (the "First Amendment"), that certain Second Amendment dated as of January 31, 1994 (the "Second Amendment") and that certain Third Amendment dated as of August 11, 1994 (the "Third Amendment"), the "Credit Agreement") and have agreed to further amend the Credit Agreement as hereinafter set forth. (2) Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. Unless referring to a section of this Fourth Amendment, all section references contained herein are references to section numbers as they appear in the Credit Agreement. SECTION 1. Amendments to the Credit Agreement. Upon the occurrence of the "Fourth Amendment Effective Date" (as defined in Section 3 below), the Credit Agreement is amended as follows: 1.1. Amendments to Defined Terms. (a) Section 1.01 of the Credit Agreement is hereby amended as follows: (i) The defined term "Cash Sweep Termination Date" is deleted in its entirety. (ii) The following defined term is inserted in Section 1.01 immediately following the defined term "CGC Permitted Indebtedness": "CGC Stock Purchase Payments" shall have the meaning ascribed to such term in Section 8.05(vii). (iii) The defined term "Restricted Subsidiary" is amended and restated in its entirety as follows: "Restricted Subsidiary" shall mean (i) each Subsidiary of the Company which has executed any of the Subsidiary Guaranties, (ii) each Subsidiary of the Company the capital stock of which is subject to the Company Pledge Agreement or any of the Subsidiary Pledge Agreements, (iii) Donn Canada Limited, a corporation organized under the laws of Canada, (iv) C.N.G. Distribution Limited, a corporation organized under the laws of Canada, and (v) CGC. (b) Section 1.02 of the Credit Agreement is hereby amended to delete the term "Cash Sweep Termination Date" in its entirety. 1.2. Amendments to Mandatory Prepayment of Cash Available for Sweep. Section 2.06(b)(i) of the Credit Agreement is amended as follows: (a) Section 2.06(b)(i)(A) is hereby amended to delete the following parenthetical phrases which appear therein: (i) "(unless the Cash Sweep Termination Date has occurred on or before such Test Date)" and (ii) "(unless the Cash Sweep Termination Date has occurred on or before the immediately preceding Test Date)". (b) Section 2.06(b)(i)(B) is hereby amended to: (i) Delete in its entirety the definition of the term "Cash Sweep Termination Date". (ii) Insert the word "Unrestricted" in the definition of the term "Minimum Liquidity" immediately before the words "Retained Amounts" therein. (iii) Amend and restate the definition of the term "Sweep Percentage" in its entirety as follows: "'Sweep Percentage' means (i) 100% for the Test Dates occurring in 1995 and 1996, (ii) 90% for each of the Test Dates occurring in 1997 and 1998, and (iii) 85% for the Test Date occurring in 1999 and any subsequent Test Dates; provided, that the Sweep Percentage shall be 50% for any Test Date for which the ratio of "Debt" as of the last day of the immediately preceding Fiscal Year to "EBITDA" for such Fiscal Year (as such terms are defined in Section 9.01 hereof, but without reference to Section 9.10 hereof) was less than 4.0 to 1.0; and provided, further, that the Sweep Percentage shall be 0% for any Test Date on which the aggregate principal amount of outstanding Term Loans is less than or equal to $150,000,000." 1.3. Amendment to Mandatory Prepayments. Section 2.06(b) of the Credit Agreement is hereby further amended to insert the following subsection (iii): "(iii) Certain Public Debt Investments. So long as (and only to the extent that) the outstanding principal amount of the Term Loans is greater than $150,000,000, the Company shall make or cause to be made a mandatory prepayment of the Term Loans, applied in the order of maturity, in an amount equal to the amount of each Investment in Public Debt made under Section 8.03(ix)(b) hereof, such mandatory prepayment to be made at any time on or after the making of such Investment, but in no event later than the tenth (10th) day following the last day of the calendar quarter in which such Investment was made." 1.4. Amendments to Reporting Covenant. Section 6.01 of the Credit Agreement is hereby amended as follows: (a) Section 6.01(a) of the Credit Agreement is amended to add the following proviso at the end thereof: "provided, that the Company shall have no obligation to deliver the foregoing documents for any fiscal month for which the ratio of 'Debt' as of the last day of the immediately preceding fiscal quarter to 'EBITDA' for the 12- month period ending on the last day of such fiscal quarter (as such terms are defined in Section 9.01 hereof, but without reference to Section 9.10 hereof) was less than 4.0 to 1.0;" (b) Section 6.01(b) of the Credit Agreement is amended to insert the following immediately after the word "above" in the second line thereof: "or pursuant to clause (c) below". 1.5. Amendments to Investments Covenant. Section 8.03 of the Credit Agreement is hereby amended as follows: (a) Section 8.03(viii) of the Credit Agreement is amended to delete clause (E) thereof in its entirety. (b) Section 8.03 of the Credit Agreement is further amended to delete clauses (ix) and (x) thereof in their entirety and to substitute therefor the following: "(ix) Investments in Public Debt, in order to effectuate the prepayment (or defeasance, subject to restrictions acceptable to the Agents) of such Public Debt, made with (a) Unrestricted Retained Amounts or (b) other funds, provided that with respect to Investments under this clause (b), Available Liquidity (as defined in Section 2.06(b)(i) hereof but calculated as of the time of such Investment and after giving effect thereto and to the mandatory prepayment of the Term Loans required as a result thereof under Section 2.06(b)(iii)) shall equal or exceed $100,000,000; (x) Investments, not otherwise described in clauses (i) through (ix) above, in 10-1/4% Senior Notes, in order to effectuate the prepayment (or defeasance, subject to restrictions acceptable to the Agents) thereof, not exceeding $30,000,000 in the aggregate amount at any one time outstanding; and (xi) any other Investments not otherwise described in clauses (i) through (x) above, not exceeding Forty Million Dollars ($40,000,000) in the aggregate at any one time outstanding; provided, that Investments in Public Debt under this clause (xi) shall not at any one time exceed an aggregate amount of $5,000,000." 1.6. Amendment to Restricted Junior Payments Covenant. Section 8.05 of the Credit Agreement is amended to delete clause (vii) thereof and to substitute therefor the following: "(vii) the purchase, repurchase, acquisition or redemption (as applicable) of the publicly owned common stock of CGC by (A) CGC, in an amount not to exceed 10% of its total outstanding shares of common stock in any single calendar year and/or (B) the Company (each payment by the Company for such stock being a "CGC Stock Purchase Payment")." 1.7. Amendment to Capital Expenditures Covenant. Section 9.08 of the Credit Agreement is hereby amended to (a) insert the words "Unrestricted Retained Amounts" in clause (v) thereof, and (b) insert the following at the end of such Section 9.08: "For the purposes of the foregoing, so long as the aggregate outstanding principal amount of Term Loans is greater than $150,000,000, all CGC Stock Purchase Payments made by the Company during any Fiscal Year shall be deemed Capital Expenditures and shall reduce the aggregate amount of Capital Expenditures permitted in such Fiscal Year accordingly; provided, that the Company may make CGC Stock Purchase Payments during a Fiscal Year in excess of the then remaining amount of Capital Expenditures permitted hereunder, in which case no further Capital Expenditures may be made by the Company and its Subsidiaries during such Fiscal Year and the amount of CGC Stock Purchase Payments made in excess of such remaining amount of permitted Capital Expenditures shall be allocated to the following Fiscal Year (and, if necessary, succeeding Fiscal Years). It is understood that, once the aggregate outstanding principal amount of Term Loans is less than or equal to $150,000,000, all such CGC Stock Purchase Payments shall be deemed not to have been Capital Expenditures ab initio, and the Company and its Subsidiaries shall be entitled to the use of Base Capital Expenditures Allowances under clause (viii) above for prior Fiscal Years without regard to any deemed use on account of CGC Stock Purchase Payments." SECTION 2. Release of Capital Stock of CGC and USG Interiors (Donn) S.A. Pursuant to Section 12.01(c)(ii) of the Credit Agreement, the Requisite Senior Lenders hereby direct the Collateral Trustee to (i) release the capital stock of each of CGC and USG Interiors (Donn) S.A. ("Donn") from the Liens granted to the Collateral Trustee pursuant to the applicable Subsidiary Pledge Agreements executed by Foreign Investments, (ii) deliver the stock certificates and stock powers relating to such Subsidiaries to the Company, and (iii) cancel and terminate the Subsidiary Pledge Agreement pursuant to which the capital stock of Donn was pledged. SECTION 3. Conditions Precedent to Effectiveness. This Fourth Amendment shall become effective as of the date (the "Fourth Amendment Effective Date") on which each of the following conditions precedent shall have occurred: (a) Documentation. The Agents shall have received all of the following: (i) Counterparts of this Fourth Amendment executed by both of the Borrowers, the Agents, the Administrative Agent and Senior Lenders whose Term Loans and Revolving Loan Commitments aggregate 66-2/3% or more of the sum of the then aggregate unpaid principal balance of the Term Loans and the then aggregate principal amount of the Revolving Loan Commitments; (ii) Reaffirmations of Guaranties executed by the Company and each Subsidiary party to a Subsidiary Guaranty, in form and substance reasonably satisfactory to the Agents and counsel for the Agents; (iii) The opinion of the Assistant General Counsel of the Company and Interiors relating to such matters as the Agents deem appropriate and in form and substance reasonably satisfactory to the Agents and counsel for the Agents; (iv) A certificate of the Secretary or Assistant Secretary of the Company certifying (A) the names and true signatures of the incumbent officers of the Company authorized to sign this Fourth Amendment and all other Loan Documents executed by the Company in connection herewith and (B) the resolutions of the Company's Board of Directors approving and authorizing the execution, delivery and performance of this Fourth Amendment and all other Loan Documents executed by the Company in connection herewith; and (v) A certificate of the Secretary or Assistant Secretary of Interiors certifying (A) the names and true signatures of the incumbent officers of Interiors authorized to sign this Fourth Amendment and all other Loan Documents executed by Interiors in connection herewith and (B) the resolutions of Interiors' Board of Directors approving and authorizing the execution, delivery and performance of this Fourth Amendment and all other Loan Documents executed by Interiors in connection herewith. (b) No Events of Default. No Event of Default or Potential Event of Default shall have occurred and be continuing. SECTION 4. Confirmation of Credit Agreement. Except as herein expressly amended, the Credit Agreement is ratified and confirmed in all respects and shall remain in full force and effect in accordance with its terms. Each reference in the Credit Agreement to "this Agreement" shall mean the Credit Agreement as amended by the First Amendment, the Second Amendment, the Third Amendment and this Fourth Amendment, and as hereafter amended or restated. SECTION 5. Costs and Expenses. Each Borrower agrees to pay on demand all costs and expenses of the Administrative Agent and the Agents in connection with the preparation, reproduction, execution and delivery of this Fourth Amendment, including the reasonable fees and out-of-pocket expenses of Sidley & Austin, counsel for the Agents. SECTION 6. Successors and Assigns. This Fourth Amendment and the other Loan Documents executed in connection herewith shall be binding upon the parties hereto and thereto and their respective successors and assigns (including, without limitation, a receiver, trustee or debtor-in-possession of any of the Borrowers) and shall inure to the benefit of the parties hereto and thereto and the successors and permitted assigns of the Senior Lenders, the Agents and the Issuing Banks. SECTION 7. Execution in Counterparts. This Fourth Amendment may be executed and delivered in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same original agreement. SECTION 8. Governing Law. This Fourth Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 9. Headings. Section headings in this Fourth Amendment are included herein for convenience of reference only and shall not constitute a part of this Fourth Amendment for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. USG CORPORATION By____________________________ Title: USG INTERIORS, INC. By____________________________ Title: CITIBANK, N.A., as Administrative Agent, as an Agent and as a Senior Lender By Title: BANKERS TRUST COMPANY, as an Agent and as a Senior Lender By Title: CHEMICAL BANK, as an Agent and as a Senior Lender By Title: -----END PRIVACY-ENHANCED MESSAGE-----